Putin, Medvedev discuss investment climate

Stability is not the same as stagnation, and improving the military does not mean that Russia is militarizing - at least that's the message the Russian leadership promoted during events of the last week.

The Russian
bank VTB Capital held the latest iteration of its regular investment conference
“Russia Calling” in Moscow on Oct. 5-7. In attendance were Russian Prime Minister
Vladimir Putin and Minister of Economic
Development and Trade Elvira Nabiullina, as well as representatives of
some of Russia’s largest companies, including Lukoil and Russian Railways. As
usual at such events, however, the words Russian politicians chose for a forum
ostensibly aimed at attracting investors seemed slightly misguided.

Putin conceded that to attract investors, Russia had to reduce both
economic and administrative risks:
“Policy predictability is no less
important than macro-economic
stability… we’ve no intention of standing
on the spot, but we believe
that our citizens and our economic and political partners have to sense the continuity of our course. Russia should be a stable, sound and attractive country for
investors.”

And he tried
to assure investors that the government would continue to follow a responsible
macro-economic policy: “Strict budgetary discipline, more efficient spending
and limiting state debt remain our priorities,” Putin said. He did not rule out
a balanced budget next year if the global economy was favorable, although up to
now the government has assumed a budget deficit of 1.5 percent of GDP in 2012. The prime minister said the Russian view was that the global economy
was recovering and that a second round of the crisis was
hardly likely in the foreseeable future,
even if the recovery took longer than expected.

But Putin also took the opportunity
to criticize the west, telling a German attendee at the forum: “You offer us EU
membership? You should sort out your debts first. We don’t intend to become
members of NATO or the EU. We can handle our own security independently,” before
nevertheless adding that Russia wanted to cooperate more closely with the EU
and expand a free trade zone. On his country’s efforts to join the World Trade
Organization, Putin said that the benefits and costs to Russia were about “50-50,”
or probably just slightly more on the plus side.

The prime minister also veered
off into territory unusual for an investment forum, attempting to justify the
planned rise in Russia’s military spending. Putin said
increased spending on the armed forces would lead to an increase in the country’s
technical level in general and contribute to the overall development of
the economy: “I’m sure that, based on our technological reserves, on the
potential of our human resources and our balanced macroeconomic policy, we can
ensure the rate of economic growth that the country needs… That will certainly
not be confined to reequipping the army, the main task, but will also
contribute to raising the level of the Russian industrial production in the
real sector. And a significant part of this upgrading will be applied in making
products for civilian use.”

Putin gave more details during a cabinet meeting on Oct. 7, saying that Russia
would invest 3 trillion rubles ($95 billion) in the military and that the 1,700
enterprises in the military sector would have to be thoroughly modernized.

“The
development of innovative technologies
in the defense industry is a top
priority for us, said
Putin, “which is why some 20 percent of the total funding
will go on research and design
work… and immediately stimulate high-tech sectors.”

What is striking about this approach is that
while it looks very optimistic, it flies in the face not only of the country’s
Soviet past, but its present. Most Russians believe that the Soviet Union was a
major scientific and technical power, and it did chalk up some achievements.

In the end, though, the country was left
standing by the West and Japan not only in military, but also in civilian
technology, with dire consequences. Even Putin has admitted that the
technological secrets he acquired during his time as a spy in East Germany were
never utilized in the Soviet Union. And the reason was of course that, in
modern parlance, the “eco-system” for high-tech simply didn’t exist there.

Now, with 40,000 Russians working in Silicon
Valley and well-educated Russians still leaving the country, it is hard how to
see how Putin’s hopes for a high-tech future can be realized - at least to the
extent he expects. Moreover, his cautious, softly-softly approach to change
just means that other countries such as China and India will be able to catch
up with Russia all the faster – a danger which Russia has hardly acknowledged.

Putin’s optimism also stands in contrast to the damper
that President
Dmitry Medvedev gave during a meeting with regional members of the United
Russia party on Oct. 8. Medvedev, who has spent most of his presidency promoting
innovation and technological development, seemed in a much more somber mood as
he told his audience that Russia’s investment climate was bad, and that every
year for 10 years, decisions had been made to reduce administrative barriers: “I
had an optimistic feeling about 10 years ago. I used to think as a practicing
lawyer and thought: wonderful, here this will be scrapped, there, everything
will become easier. But nothing worked out, everything seemed to get sucked in,
like into cotton wool. The law is not everything, we still need to lose the
legal illusion that good laws can make a radical change in the situation,” said
the president. Laws, he said, should be imposed on the correct way of thinking,
“on good normal officials.”

This
is the story of the Soviet Union and, to an increasing number of observers, of
modern Russia, whose bureaucracy now seems to put the brakes on change,
progress and modernity as much as the 19 million members of the old
Communist Party ever did.

But Medvedev still found a
way to end on an optimistic note. “We have to say ‘yes’ to stability, and ‘no’
to stagnation,” he said. “There is a huge difference between stability
and stagnation. The task of our [United Russia] party is to provide stability,
and not let things slide into stagnation, not least because we’ve already gone
through that in a well-known historical period,” said Medvedev. According
to the president, all that goes to form the investment climate.

Ian Pryde is
Founder and C.E.O. of Eurasia Strategy & Communications in Moscow.